Each of us has our own idea of the ideal retirement. Does yours consist of traveling the world? Do you want to spend the rest of your days fishing? Do you just want to spoil your grandkids to death?
Retirement is that state of life when we are able to leave the workforce permanently and live with financial independence. Two elements of retirement to consider are how to prepare for retirement and when to retire. What you do now will help determine how and when you retire.
Planning For Retirement
There are many things to weigh when planning for retirement. Here are some basic steps to take to prepare:
1) Paint a Picture of Retired Life
Make plans about how and where you’d like to live during retirement. Also, make an estimate of how long you might live. With these ideas in mind you’ll get a picture of how much money you’ll need to live during retirement and when you’ll be able to retire. As of this year, the ideal retirement age has risen to 67.
CNN Money Retirement Planner, T. Rowe Price’s Retirement Income Calculator, Fidelity’s Retirement Quick Check and Vanguard’s Retirement Income Calculator are all good retirement calculators to take a look at, if you need to crunch some numbers.
2) Learn about Investment and Financial Resources
If you are still in the military, the Thrift Savings Plan (TSP) is an investment option. After you separate from the armed forces, you won’t be able to put any more funds into it. You’ll want to find alternatives to the TSP.
If your employer offers a 401(k), then contribute to it. Many employers will even match your contribution up to a certain percentage of your salary, and that means free money. There is currently a $17,000 limit to how much you can put away each year.
Also, there might be limits on how you can invest your money within your company’s 401(k) plan, but you’ll be able to determine where the money is invested. If you withdraw your funds before you turn 59 1/2, you’ll be penalized. Likewise, you must withdraw before you’re 70 1/2, to avoid a penalty.
Another option is an Individual Retirement Account (IRA). The difference between an IRA and a 401(k) is that the IRA has nothing to do with your employer; you set it up on your own. You’ll have more options for investment — such as stocks, bonds, mutual funds and certificates of deposit (CDs) — but there are no matching funds. There are several different types of IRAs, including traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs. Each type has eligibility restrictions and they all have caps on how much you can contribute each year, along with penalties for early withdrawal. When you retire, you might consider rolling over your 401(k) investments into an IRA.
The rumors continue to mount that Social Security is broken and won’t be around too much longer. All things considered, it is general wisdom not to rely solely on Social Security for your retirement benefits. It is still important to know what you are entitled to. The major issue is what the government considers full retirement age. You’ll get a reduced benefit if you decide to draw from Social Security before that date.
3) Determine Investment Strategy
Each person is going to have their own strategy on how your money should be invested. Risk, amount, time are all going to be factors to consider. One approach is to diversify your investments, that way there will be some healthy growth, but if your riskier investments go under, you won’t be left stranded. Another approach is to invest based on where you are in your life. The younger you are, the more risk you can take. As you get close to retirement age, it is advised that you shift your money to more stable investments such as bonds. Also, determine if it is possible to invest too much money — you might pay more in taxes than you would like when you withdraw.
All in all, your best bet is to talk to a professional financial planner. They will know all the ins and outs of what is available.
4) Health Care
Determine how your health care costs will be covered after you retire. A major threat to retirement finances are out-of-pocket costs. Find out what the VA covers. If you are retired military, then know what is covered through your military pension. Also, determine when Medicare kicks in and what it covers.
When to Retire
After all the planning is done, the question to ask now is when should you retire. If you want to retire early, how can you afford to do so? Some of the reasons people give for early retirement are dissatisfaction with work, desire to fulfill other ambitions or health issues. You’ll have to decide if you are financially able to leave the workforce, but your age will determine how you can accrue your benefits.
There are a few things you’ll need to do before you retire early. As mentioned above, you’ll incur a penalty if you take out money from your 401(k) or IRA early. Also, you can start receiving Social Security at 62, but at a reduced amount. So, it might help to live off your retirement budget for a while before you actually retire to see if it is viable. With health care, you might need to find a placeholder until your Medicaid benefits kick in. This, of course, depends on your VA and military retirement benefits.
If you plan ahead and save accordingly, then your retirement ought to be a timely one.
Where Veterans Retire
After you know when you’re ready to retire, it might be time to start thinking about location. You might be surprised to hear that recently surveyed veterans voted Oklahoma City the top place to retire. Oklahoma City’s cost of living, growing economy and fun atmosphere make it a noteworthy retirement destination.
Photo courtesy Tax Credits